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My successful domain option deal and things to consider

Here are a few things to consider before entering into a domain name option deal.

I recently completed a sale to a startup after an option agreement.

I gave the company an option to buy the domain name by a set date, with monthly payments during the option period. The option payments went toward the purchase price, and they could exercise the option at any time during the option period.

Here are a few things to consider when doing a deal like this.

Are you getting a lot of inquiries for the domain? The cost to the domain owner of entering into an option agreement is that you have to take the domain off the market for a period of time. I wouldn’t recommend doing this on a domain that gets lots of qualified offers, unless the pot at the end of the option period is substantially higher than the offers you’ve received.

Does the company want to use the domain during the option period? In this case, the company just wanted to have an option while it explored its business idea and sought funding. It didn’t want to use the domain during the option period. This is less risky for the domain owner since a company using the domain can potentially damage it (e.g. bad SEO). I offered lower option payments because the company wasn’t going to use the domain during the option period.

Should option payments count toward the final purchase price? You can negotiate for the option payments to count toward the purchase price, or have some portion count toward the purchase price. Having less than 100% go toward the purchase is an incentive for the buyer to exercise the option sooner. In my case, with a relatively short option period expiring before the end of the calendar year, the option payments counted toward the purchase price. Had it been a longer option period, or if the buyer had asked for an extension, I would have negotiated for only a portion of the payments to go toward the purchase.

You need a contract. You need a contract when you do an option deal like this. The buyer provided one in my case. Zac Muscovitch has done a lot of work with this type of agreement.

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  1. Ivan Rasskazov

    I like this. Secure the domain with option for purchase if the idea raises funding. The domain registrant monetizes the domain while the company limits risk in a period of uncertainty.

    I think it could make sense to have Zac on a podcast to describe advantages and pitfalls of such deals, as well as his experience.

  2. Steve

    I wish you luck with this.

    It’s never worked out for me. 80-90% of startups fail. 75% of funded (i.e, over $1 million) in funding fail.

    I mitigate risks. I’d engage in this, but ONLY if the startup has completed a Series A round, which mitigates risks, with multiple scenarios for exit strategies.

    But, if you’re not getting lots of high offers for the name, it could be worth the risk. And if you don’t have any immediate cash flow challenges.

    Good luck, Andrew!

  3. Eric Lyon

    I’ve never had much luck with “option to buy” deals myself. However, it appears to be a solid business model for many investors. I think the way that you outlined it is very helpful to anyone looking to see if such a business model would work for them self.

    On a side note, such an option probably only works good with a premium or category killer domain. This type of business model wouldn’t work for most niches.

  4. Jacob Fedosky

    Do you mind sharing the price the company paid for the option itself? Even a range would be helpful. I’ve been interested in doing something similar but I’ve struggled to find an agreeable option price.

    • Larry

      I’ve done these deals for people. $10k is a typical amount that I’ve used with, say $150k as the buy price. Those numbers can be anything it’s subject to negotiation like anything else.

  5. Brandon Abbey

    Back in a prior life I had one of these that got out of control when the buyer filed bankruptcy and claimed the domain as an asset. This was done right before a yearly payment was due. It was held up in court for two years. In the meantime the court allowed the buyer to try to sell the name, which he did. Seller eventually got paid and, using the court system, the buyer was able to tie up this appreciating asset.

  6. Frank Schilling

    What happens if a UDRP proceeding is started against the name by a complainant? Who is responsible for defending the name? Who is responsible for the defense costs?

    • Andrew Allemann

      That’s an issue that should be spelled out in the contract. I know at least one UDRP was filed against a domain that was under a payment plan at Escrow.com. It was further complicated because the whois showed Escrow.com, but it wasn’t the owner of the domain.

  7. thelegendaryjp

    I agree with the above concern, it would take the near perfect storm of circumstance to make this actually work right from start to finish.

    My approach, this is the price, buy it or goodbye. The cost involved in legalities, disputes, non payments, uses etc make it essentially not worth it….UNLESS the initial down money is so good the risk is covered from the start. God knows I ain;t starting that rabbit hole for $1000. Add a couple zero’s and we’d talk.

  8. Joseph Peterson

    Flexible purchasing plans like optioning and leasing are very important; and the domain industry is woefully behind on offering them in a streamlined, integrated fashion.

    Most buyers initially arrive with low budgets. They can’t / won’t / don’t pay us. So we waste, what, 95% of the market interest in our domains? Since we usually demand payment up-front, these buyers go elsewhere. They choose inferior names. It’s a lose-lose scenario.

    Imagine if leasing and optioning were simple, convenient, and publicized to the point that buyers understood them. Many of those buyers we turn away could get what they want and pay us. Not all, of course. But more. We’d be extracting the market value from our domains more efficiently

    This isn’t a crazy untested idea. When people go to the car dealership, the salesmen don’t try to sell automobiles for a lump cash sum. No, they offer convenient financing because they know they can convert more walk-ins into customers and earn more money that way – by helping them bridge the gap.

    Sure, there are risks, as Brandon Abbey and Frank Schilling point out. And Andrew Allemann too. But those negative outcomes would only arise in a fraction of cases. As with anything else, the risks can be dealt with in the contracts or counterbalanced by higher payments.

    If a large company offered these optioning / leasing plans to a large group of customers, then risk could even be dispersed through insurance. In the even of a UDRP, the company facilitating the transaction could handle the defense with the domain owner and/or future owner paying a deductible.

    Custom contracts, while useful, are a deterrent to widespread use. And with everybody constantly reinventing the wheel, domainers aren’t pooling their experience as much as they could do. I think this industry’s future will see optioning, leasing, and financing built into the market places themselves.

    That’s 1 reason I always tried to support François Carrillo, since his eCop platform began promoting optioning years ago.

  9. VoiceAsComputing

    It could work well for a less popular domains, particularly in the tech niche, when the price is in the low 5-figs. Then the low volume of inbound inquiries would warrant increased risk to the owner.

    But, the cost of a lawyer could still make the deal unsustainable…

  10. Andrew Allemann

    Ron Jackson has talked publicly about doing deals for domains around $2k-$3k with small businesses on a payment plan. Those don’t require as much legal work because the losses can be limited.

    • thelegendaryjp

      Only way Id do it $$$,$$$ down. I have been involved in many escrow payment plans but the down payment has always been large enough that even if the buyer went belly up it was well worth the try 😉

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